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Sustainable Investing

90% of Companies Are Developing an ESG Strategy

Morningstar survey shows corporate sustainability teams are now at the heart of key business decisions. That bolsters shareholder value, analyst says.

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Some 90% of companies either have or are developing a formal strategy to manage corporate environmental, social, and governance practices, according to a Morningstar Sustainalytics survey of 556 corporate social responsibility and sustainability professionals. Corporate sustainability teams are increasingly at the center of important business discussions, based on an intensifying stakeholder focus on ESG issues, expanding investor expectations, and shifting approaches to climate change and regulation.

That means good things for shareholders. “It is increasingly apparent that material environmental and social factors play a role in a company’s performance and shareholder returns,” says Alyssa Stankiewicz, associate director of sustainability research at Morningstar. “For example, if a company’s supply chain is prone to increasingly frequent severe weather events, which is the case in countless regions across the world these days, it’s prudent to shore up protections and infrastructure to ensure the business can continue operating. If a company is proactive about treating its workforce well, it won’t suffer as much as competitors from turnover, and it will save on costs like hiring and training new employees.”

Stankiewicz continues: “Given how central environmental and social factors are to a company’s success, it stands to reason that their oversight shouldn’t be sidelined within a company’s strategy. Companies that are proactive on corporate sustainability measures are able to drive a long-term advantage for their shareholders.”

The global survey of took place in 2022 between June and August and represented a cross section of company sizes and industries, including financial services, technology, manufacturing, and the public sector.

Here are a few takeaways from the report:

1) ESG Planning and Strategy Are Influenced by Numerous Stakeholder Groups

Across industries, the study reflects that companies are highly engaged in issues of sustainability and implementing ESG practices. Indeed, 91% of firms surveyed are setting specific goals or key performance indicators related to this strategy. Although dedicated ESG practices are more common with large to medium-size firms, 20% of smaller sized companies are now dedicating teams to ESG management.

What impacts organizations’ ESG planning and strategy? Eighty-one percent of respondents say that senior leadership is a major influence in ESG practices, suggesting that sustainability is a top-down approach.

Stakeholders also exert influence on sustainability programs. According to 86% of respondents, institutional investors have major or moderate influence on corporate ESG strategy. Another 69% specified activist investors. Finally, customers and clients also have significant influence, with 94% of respondents citing their major or moderate influence on the organization’s ESG planning and strategy.

Separately, financial professionals are also finding ESG to be important in their investment decision-making. In another study, Morningstar Indexes and Morningstar Sustainalytics interviewed asset owners on their attitudes toward ESG. Eighty-five percent of respondents said ESG factors are “very material” or “fairly material” to their investment process, and “most respondents consider ESG objectives as valid goals when pursued alongside (but not at the expense of) financial objectives.”

2) Budget and Staffing Challenges Top the List of Hurdles

The biggest hurdles to implementing sustainability programs are budget constraints, cited by 89% of the companies surveyed 89%, and a lack of human resources support, at 87%. Indeed, these topics rank as larger hurdles than factors like employee expertise, reporting, or goal-setting.

To mitigate these challenges, companies are seeking outside help. Sixty-one percent of firms have turned to external consultants to help address ESG issues, and 58% utilize ESG standards and frameworks as written sources of guidance and direction. These standards, such as the Sustainability Accounting Standards Board, help firms understand which ESG issues are most material and what topics should be disclosed in each area.

3) Environment Is the Top Priority for Corporate Issuers

For 58% of sustainability professionals, environmental issues are more important than corporate governance practices and social issues. When respondents were asked about their firm’s ESG priorities for the coming year, some 84% of respondents said managing carbon emissions from their business operations was the overwhelming priority.

This comes as no surprise, as climate change is at the forefront of media coverage and is the emergent issue of focus within the regulatory space. As Wilco van Heteren of Morningstar Sustainalytics puts it, “Regulation, at least in certain regions, is advancing around environmental topics and less so on social topics, [therefore] companies’ emphasis on the E versus the S and the G seems natural.”

This being said, social and governance topics are still playing a major role in strategy development across industries. Occupational health and safety are ranked as a priority by 58% of respondents, human capital management by 51%, and human rights by 48%. According to van Heteren, “This development is triggered by strong public responses to a range of social issues, including mistreatment of minority groups, which have been amplified by social media.”

4) What’s Next?

As Morningstar examined companies at all stages of integrating sustainability into their strategy, it found that most face similar challenges and must turn to external resources for solutions. Firms are consulting multiple stakeholders, including investors, to shape their strategic priorities. “ESG brings about great opportunities for innovation and risk management,” says Leyla Alijani from Pacific Western Bank.

The most forward-looking companies are looking beyond regulatory compliance and using ESG factors to create value and positive impact. “Most companies new to disclosing on ESG factors are motivated to comply with regulations,” says Morningstar Sustainalytics ESG research director Eric Fernald. “But leading companies have mastered compliance and now focus on meeting best-in-class environmental goals and maintaining a strong brand identification with excellent corporate citizenship and strong stewardship over the environment.”

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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